Smaller Wealth Managers Enter the Bank Market

Many community banking companies have wealth management units, but lately more small and midsize wealth managers have been getting into the banking business.

Wedbush Inc., the parent of Wedbush Morgan Securities, will open Wedbush Bank on Monday. Capitalized with $20 million, the start-up will offer business loans and cash management services to small and midsize companies, along with personal loans, checking accounts, certificates of deposit - and possibly trust and insurance services in the future - to business owners and other high-net-worth individuals.

R. Scott Racusin, the bank's chief executive, said initially it will operate from a branch on the 11th floor of Wedbush Inc.'s headquarters in downtown Los Angeles, with a team of four to six business development officers searching for customers in Southern California.

But the bank's main emphasis will be on cross-selling products and services to the wealth manager's clients through broker referrals, an online banking site and kiosks for opening checking accounts in select offices within the wealth manager's 11-state market, mainly in the West. It also has offices in Boston and New York.

"The more you can consolidate financial relationships into one entity, the better chance you have to produce a tighter relationship," Racusin said.

It is not uncommon for large brokerage houses and insurance companies to establish or buy banks or thrifts, but in recent years more small and midsize wealth managers have followed suit.

One of the first was Southwest Securities Inc. of Dallas. In 2000 its parent, SWS Group Inc., bought the $366 million-asset First Savings Bank in Arlington, Tex., which was renamed Southwest Securities Bank in 2004. The thrift now has $1.2 billion of assets.

In 2006, Stifel Financial Corp., the St. Louis parent of Stifel, Nicolaus & Co., bought First Service Financial Co. and its $130 million-asset FirstService Bank, which was renamed Stifel Bank and Trust. The St. Louis commercial bank now has $250 million of assets.

In October the leaders of Keller Financial Group of Irvine, Calif., opened First Foundation Bank, mainly to serve as a private bank for wealth management clients.

Burton Greenwald, an analyst with BJ Greenwald Associates of Philadelphia, said the trend is "all about everybody wanting to have the primary financial relationship with their clients, and to do that, they need to have powers that go beyond the conventional brokerage firm."

Greenwald said he expects the trend among small and midsize firms to accelerate. "Firms are recognizing that unless they have a diversified product line, they are going to lose clients to more aggressive competitors."

Charles "Chip" Roame, the managing principal with the San Francisco consulting firm Tiburon Strategic Advisors, said one of the main reasons wealth managers want to own banks is to retain their clients' investment proceeds in low-cost deposit accounts.

Racusin said that Wedbush Bank will offer online banking immediately and that within a year customers will be able to apply for loans online. Within the next six months the bank will install kiosks in a number of Wedbush Morgan Securities offices to allow clients to bank online, deposit checks remotely, and, eventually, open checking accounts.

The first kiosks will go in offices in high-growth or high-volume markets, he said.

Wedbush Bank's business development officers will work initially out of the main branch, but the bank may open additional branches or consider buying a branch or even a bank, most likely in Southern California, Racusin said.

Richard A. Soukup, a partner with the Chicago office of the consulting firm Plante & Moran PLLC, said that Wedbush Bank may be able to attract commercial borrowers close to its home base using known lenders there, though it may have a harder time cross-selling loans to wealth management clients much farther away.

"It may be unrealistic to go after the whole customer banking relationship in those markets - they are probably trying to pick off the most attractive or most profitable pieces, such as cash management," Soukup said. "If they're convenient, and they offer good rates, they'll definitely be competitive."